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AUD spikes as fed adjusts its inflation management

OFX Daily Market News

Posted by OFX

AUD – Australian Dollar

The Australian dollar drifted sideways throughout domestic trade on Thursday before bouncing through resistance and testing a break above 0.73 overnight. Direction across currency markets was largely muted in the lead up to Fed Chair Jerome Powell’s speech at the Jackson Hole Monetary Policy Symposium, as investors waited to see if the Fed would commit to further monetary policy stimulus measures. As was expected, Powell confirmed policy makers would seek to achieve an average inflation target of 2%, moving away from a fixed target and allowing periods of higher inflation to be offset by periods of low inflation. The decision allows the Bank to keep interest rates near zero for longer, opening the door to further deterioration in yield comparisons. The AUD immediately jumped through resistance at 0.7260 to touch intraday highs at 0.7291, before drifting lower into this morning’s open. After the knee jerk response investors then chased the US dollar higher as proactive monetary policy aimed to drive activity and underpin employment continues to find support in the current market. Despite the immediate correction, the aggressive monetary policy adjustment will be a negative for the USD in the long-term. Having broken resistance, the door is now open for the AUD to extend gains and push toward 0.75 US cents leading into the end of the year.

Key Movers

The US dollar edged higher this morning despite confirmation from the US Federal Reserve it will amend its inflation management system, effectively keeping interest rates lower for longer. Having moved away from a fixed inflation target, the Fed has greater scope to absorb periods of higher inflation, offsetting increases in prices against periods of lower inflation. The move would normally be a negative for the dollar and while the initial response saw the world base currency sink sharply, investors made an abrupt about face turn and chased the dollar higher. Positive, proactive policy setting designed to drive activity and underpin employment continues to find value in the current market as investors seek assurances governments and central banks will do whatever it takes to guide the global economy through the COVID-19 crisis. The dollar index closed 0.2% higher on the day breaking back through 93.

Despite the short term support we expect the policy change will act as a drag on the US dollar. If the Fed is able to absorb price pressures and leave rates on hold near zero for longer, a greater disparity in yields will emerge as other central banks begin to show signs of tightening.

Expected Ranges

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